Fed Expected to Cut Interest Rates as Early as Next Week

From Reuters

The Federal Reserve may cut interest rates as early as next week to perk up the nation's sluggish economic recovery, economists said Friday.

The Fed's policy-making body, the Federal Open Market Committee, meets Tuesday and may decide to trigger another rate reduction, they said.

"There's a good chance they (will) ease at the meeting," said Douglas Schindewolf, associate economist at Smith Barney, Harris Upham & Co.

In its role as the nation's central bank, the Fed can use interest rate policy to pump money into the banking system, spurring borrowing and spending to enhance the economy.

The Fed has been steadily cutting rates for the past year to temper a recession that began last July.

The Fed is likely to take its clues from data on the nation's money supply because the amount of money in circulation determines how fast the economy will grow.

The latest report showed M2--a measure of currency in circulation, savings accounts, checking accounts, small time deposits and money market mutual funds--rose $1.2 billion in the week that ended Aug. 5.

That puts the money supply's growth at 2.8% for the year so far, just skimming the bottom of the Fed's 2.5% to 6.5% target. New monthly figures showed M2 in July fell $10.6 billion.

M2 on a monthly basis has only declined five times since 1959, said Carl Steen, an analyst at Maria Ramirez Capital Consultants Inc. "It doesn't occur very often."

And the money supply's gain in the latest week was still quite meager, economists said.

"There still isn't any real growth in the weekly numbers," said Darwin Beck, an economist at First Boston Corp.

"If they don't see some strength in the next two weeks," the Fed policy-makers could cut rates again, he said.

At Tuesday's meeting, they will have an estimate of weekly money supply data to be published Thursday and "preliminary guesses for the following week," Beck said.

"The odds favor an easing at the meeting," Beck said.

The next rate reduction is expected to take the form of a half-point discount rate cut to 5% and a quarter-point ease in the federal funds rate target to 5.25%.

The discount rate is the amount it charges banks for short-term loans. The fed funds rate is the amount banks charge one another for overnight loans. It influences rates on everything from home mortgages to consumer loans.

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